Previously, we’ve discussed how you can use your home equity to finance your home remodeling needs. However, are you aware that you can use it for other reasons too?
To review, home equity is the portion of your mortgage that you’ve paid off. To determine your home equity, just get the difference between what your home is worth and how much is still owed on your mortgage.
For most of us, equity from homeownership is a great way to build personal wealth over time. As your home’s value increases over the long term and you pay down the principal on the mortgage, your equity value also increases.
Why Use Your Home Equity?
The primary reason why home equity is a smart choice for financing is due to the low interest rates. A typical home equity loan only involves an average of around 5% APR, with some states like Hawaii even offering as low as 3% APY.
Best Ways You Can Use Your Home Equity
Home Improvements
By the time you’ve paid a significant amount of your mortgage in such a way that your home value is significantly greater than your mortgage balance, much time may have already passed by.
Normal wear and tear might have begun to show in your house, so it might be wise to go ahead with that remodeling plan you’ve always put off due to financing concerns.
College Costs
Student loans charge interest rates ranging from 0.99% to as high as 12.99%. While they may appear to have the same rates as home equity loans, leaving your child to take out one and letting him pay for the same might put an otherwise avoidable burden on him.
Debt Consolidation
Compounding interest is your best friend if it’s working with you to grow your money. However, if it’s the other way around, that’s the fastest way to go bankrupt. This is why paying off your interest-bearing obligations through debt consolidation will be beneficial to finally get rid yourself of this burden.
This way you don’t have to concern yourself with paying multiple entities. You can just focus your payments on your home equity loan lender.
Long-term investments
Granted that you’ve paid off your loan and have some emergency funds, you might want to explore putting your equity on investment vehicles to increase it.
Home Equity loans charge around 5% APY; whereas the average return on index funds, such as the S&P 500 (1926-2018) is around 10-11% per year. This means that you would still end up increasing your money even after paying the interest on the loan. Since your money will most likely be locked up for a certain period, this is only ideal if you have another source to pay off your monthly loan payments.
There are many ways to use your home equity. Aside from those mentioned above, you could also use it to fund emergency expenses, wedding expenses, and even to start a business. We suggest that you sit down, crunch the numbers, and ensure that you can continue paying your regular mortgage on top of a new home equity loan and that you have a solid plan for improving your finances with home equity money.
